When it comes to securing a mortgage in the UAE, understanding how mortgage interest rates work is crucial. Mortgage interest rates play a significant role in determining the cost of borrowing and the overall affordability of homeownership. In this blog post, we will delve into the intricacies of mortgage interest rates in the UAE, exploring the factors that influence them and how they can impact your mortgage journey.

What are Mortgage Interest Rates?

Mortgage interest rates refer to the cost borrowers pay for borrowing funds from a lender to purchase a property. Expressed as a percentage, these rates determine the amount of interest that accrues on the outstanding mortgage balance over the loan term.

What are the Factors that Influence Mortgage Interest Rates in the UAE?

a. Central Bank Policies: The Central Bank of the UAE plays a crucial role in setting interest rate policies. Changes in benchmark interest rates known as the Emirates Interbank Offered Rate(EIBOR) can influence mortgage interest rates in the U.A.E. Furthermore, as the UAE Central Bank policies coincide with Federal Reserve(FED) of the United States of America, US FED policies will directly impact benchmark rates set by the UAE central bank.

b. Market Conditions: Supply and demand dynamics, economic indicators, and inflation rates can impact mortgage interest rates. During periods of economic growth, rates may be higher, while a sluggish economy might lead to lower rates.

c. Lender's Assessment: Each lender evaluates risk and rates offered differently.

Factors like

a) Creditworthiness (Credit and repayment history of pervious liability commitments)

b) Residential status (Emirati, expat resident, non-resident)

c) Purpose of financing (Investment purposes vs owner occupier, green home financing, commercial property, self-construction, building finance, top-up, equity release)

d) Existing relationships with banks (Segments like Priority, Elite, Premier, Private banking will qualify for preferred rates)

e) Willingness to transfer salary or business income to a lender (salary/business income transfer or non-salary/non-business income transfer)

f) Customer employment profile/history (salaried, self-employed, landlords, repayment source)

g) Status of property (Ready or Under construction/off-plan)

h) Finance amount (E.g. above AED 5million vs below 5millon)

are considered in determining the interest rates offered to a mortgage applicant.

What are the Types of Mortgage Interest Rates Offered in the UAE?

a. Fixed-Rates/Hybrid Rates: With a fixed-rate mortgage, the interest rate remains constant throughout the specified loan term, providing stability and predictable monthly repayments. However, with longer tenor mortgages you will transition to a Variable(Follow-on/Step-up/Post rate/Go-to) rate after the expiration of the fixed tenure.

E.g. 4.24% for 3 years with a follow on rate of 1.50% + 3 month EIBOR. I.e. your mortgage will have a fixed rate resulting in fixed repayment amount for the first 3 years (36 months) and thereafter a variable rate will be applied and your repayment will also be changed accordingly.

b. Variable Rates From Day One Mortgages: Variable-rate mortgages, also known as adjustable or floating rate mortgages, feature interest rates that fluctuate over time. These rates are typically tied to a benchmark, such as the Emirates Interbank Offered Rate (EIBOR) and a fixed bank margin. Most banks update the variable rates on a quarterly basis.

c. Offset Mortgage Rates – a mortgage solution that connects your savings account to your home loan. With an offset mortgage, your savings balances are not used to directly pay off your mortgage balance. Instead, it will reduce the total interest charged on your monthly repayments.

Understanding the Impact of Mortgage Interest Rates:

a. Affordability: Higher interest rates increase the cost of borrowing, resulting in higher monthly mortgage payments. Lower rates, on the other hand, can make homeownership more affordable. However, rates are not the only factor that will narrow down the best mortgage product for your mortgage requirement. It is important to evaluate the entire mortgage product to chose the ideal mortgage solution for you.

b. Total Interest Paid: Over the life of a mortgage, the interest paid can significantly impact the overall cost of the property. Higher rates mean more interest paid, while lower rates result in reduced interest costs.

c. Refinancing Opportunities: As interest rates change over time, borrowers may consider refinancing their mortgage to secure a lower rate, potentially reducing monthly payments or shortening the loan term. With a buyout you will be able to save on interest costs in the long run and give you the possibility of paying off the mortgage in shorter time period.

Tips for Securing a Favorable Interest Rate:

a. Compare Multiple Banks: Shop around and obtain mortgage quotes from different banks to compare interest rates, terms, and fees.

b. Consider Mortgage Brokers: Mortgage brokers can help you find the best mortgage deal by connecting you with multiple banks and negotiating on your behalf. Furthermore, you may have access to exclusive offers through mortgage brokers.

c. Inquire about discounts, special campaigns, waivers and preferential rates that you may qualify for.

d. Check if the lender offers low documentation and full documentation mortgage options. With a full documentation mortgage you have the chance of securing better rates.

e. If you have an existing mortgage and you are in the variable/post introductory rate period check in your with your relationship manger or contact a branch manager and request a rate reduction, or consider a buyout to a different bank.

Understanding mortgage interest rates is crucial for any homebuyer in the UAE. By comprehending the factors influencing rates, the types of mortgages available and how interest rates can affect your financial obligations, you can make informed decisions and navigate the mortgage market with confidence. Remember, thorough research, comparison, and attention to your personal financial situation are key to securing the most favorable interest rates for your mortgage in the UAE.

If you have a need for a mortgage or need to clarify any queries regarding obtaining a mortgage please do not hesitate to contact us complementary consultation, we are just a phone call or a message away.

About the Author

This blog post was authored by FCMB Team & Zamran Zaharan.